What Is Carbon Offsetting And How Does It Work?

Corporations and individuals can cancel out the impact of some of their CO2 emissions by funding innovative projects that reduce, remove, or store carbon. This activity is known as carbon offsetting. 

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In this article, the GHG emissions management experts at SINAI define carbon offsetting and explain how it works, providing a blueprint for corporations looking to reduce their carbon footprint. 

What is carbon offsetting?  

Carbon offsetting is an internationally recognized method of taking responsibility for your corporation’s unavoidable CO2 emissions. 

The spotlight is well and truly on corporations to act responsibly and make meaningful commitments for reducing their GHG emissions to tackle climate change, with collective pressure from investors, customers, and governments.

Put simply, offsetting one tonne of carbon leads to one less tonne of carbon dioxide in the atmosphere.

Alongside robust action to reduce your corporation’s GHG emissions, offsetting what remains is best practice and the industry-standard in many sectors. 

How carbon offsetting works

Source: Climate Active

Offset credits are used to compensate for carbon emissions a corporation generates which assists in bringing their carbon footprint down to net-zero. 

Carbon offset credits are produced by projects that reduce, remove, or capture CO2 emissions from the atmosphere including energy efficiency, renewable energy, and reforestation.

Types of markets for carbon offsets

There are two different types of markets for carbon offsets: voluntary and compliance-based. 

Compliance-based market

The European Union (EU) Emission Trading Scheme is an example of a compliance market. Governments, corporations, and other organizations purchase carbon offsets so that they comply with legally binding and mandatory caps on how much CO2 they can emit annually. Those that fail to meet the set mandatory caps within a compliance market risk legal penalties and hefty fines. 

The original compliance market came about through the Kyoto Protocol's Clean Development Mechanism (CDM). In 2020, the Kyoto Protocol was superseded by the Paris Agreement. Compliance-based markets for carbon offsets are made up of both international carbon markets developed through the now-defunct Kyoto Protocol and the current Paris Agreement, together with domestic carbon pricing agreements that combine further carbon offset mechanisms.

Voluntary market 

In the voluntary carbon offset market, demand for CO2 offset credits is produced by individuals, corporations, organizations, and local Governments who buy carbon offsets to mitigate their GHG emissions to meet net-zero, carbon-neutral, or other set emission reduction targets. 

The voluntary market is controlled by various certification programs including the Verified Carbon Standard, the Gold Standard, and the Climate Action Reserve to name a few. These programs provide guidance, standards, and create requirements for project developers to follow in order to produce carbon offset credits. 

Several institutions and individuals exist within the voluntary market. In 2018 and 2019 the voluntary carbon market traded 98 and 104 million metric tons of carbon. 

Calculating your company’s carbon footprint 

To calculate your corporation’s carbon footprint, you need to collect data from a variety of areas of the business - from logistics and operations to your supply chain - in order to develop a complete and accurate footprint.

To begin, your company will need to understand what precisely needs to be included and set the boundaries of your carbon footprint. Measurements should be made up of 100% of Scope 1 direct and Scope 2 indirect emissions from your corporation’s operations, plus all material Scope 3 emissions. Scope 3 emissions are made up of indirect emissions from activities outside your firm’s own operations.

Gathering data for Scope 3 emissions typically involves numerous stakeholders and data sources. This can make them more challenging but Scope 3 emissions are important as they often account for a significant proportion of your firm’s carbon footprint – up to 90% in some cases.

By breaking down your company’s emissions into sources, you’ll be able to find hotspot areas to focus on where emissions reduction opportunities are greatest and use this insight to identify areas of risk for your firm.

Seamless carbon emissions management 

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Offsetting your firm’s carbon footprint is a simple and transparent way to reduce your impact on climate change and support innovative sustainable development projects around the world. To get started, you can begin by:

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• forecasting a baseline,
• creating an internal carbon price, and 
• managing your entire value chain from one platform. 

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SINAI's next-generation technology allows your firm to automate all of the necessary data connections and emissions calculations that are also made easily accessible from one central platform. Our scenario and mitigation modeling can help you compare and contrast marginal abatement costs of mitigation options across various areas of your business.

Are you interested in what opportunities exist beyond carbon inventories for your firm? Reach out to SINAI for a demo of our software today and see for yourself how we can help you with your carbon offsetting efforts and help your firm reach net-zero.

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